Another Narrative Failure: Foreign Treasury Sales

As with the TIC data, they aren’t really disturbed until 2014. There isn’t much correlation before, and not a great one after, either. Still, the pattern that emerges over the last few years is the reverse of the conventional claim – FOI’s are, for the most part, selling when they should be buying (yields falling) and buying when they should sell (yields rising).

It already proposes an entirely different cause, one that we know very well from studying the eurodollar system and particularly its behavior during this period. Central banks are “selling” their UST holdings as something of a highly imperfect public liquidity backstop in each domestic “dollar” market. They have to liquidate their assets (forex reserves) to aid local banks who run into big trouble sourcing “dollar” funding on eurodollar markets.

Systemic funding problems are like a “dollar” squeeze, therefore the dollar’s exchange value has tended to rise in varying degrees whenever that happens. In other words, FOI selling of UST assets has, again, starting around late 2014, more broadly correlated with a rising dollar than the other way around (which is more consistent with the narrative of inflation, globally synchronized growth, and all that bad stuff for the bond market).